Economies of scale

Summary

Working in groups of three, students analyze economies of scale for a moving business based on the size of truck used. Each student constructs an individual short-run ATC curve for a different size truck. Then the three students collaborate to determine if there are economies or diseconomies of scale and to create the long run ATC.

Learning Goals

Economies of scale; short run and long run ATC

Context for Use

Appropriate for introductory microeconomics course.

Description and Teaching Materials

Organize students into groups of three (see recommendations below for group formation). Distribute worksheet pages one and two to each student.

Students number off 1, 2, 3 and then calculate TC and ATC for their size truck and draw the short run ATC curve.

Working together, the three students share information about costs to select the best truck for each output level. This information is recorded and then used to determine if there are economies of scale or diseconomies of scale. The data are used to draw the long-run ATC curve.

Teaching Notes and Tips

It is best of students do not work with friends. Ask students to find partners they do not know well, or assign groups at random. If the class does not divide evenly into groups of three, ask two students to work together as "person 3" (the most difficult role.)

Students may be concerned that there are not economies of scale at output level 200 because the cost rises for the large truck. This could be a jumping off point for extensions of the activity: what if a super-large truck were available? Is this rise in the ATC because of diseconomies of scale, or simply a result of the short run increase in that size truck's ATC?

Assessment

Students should be able to apply the calculations to other examples. And, students should be able to identify other examples of economies of scale (and counter examples of diseconomies of scale) in the real world.